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Washington State Investment Board

Twenty-First Annual Investment ReportJune 30, 2002

cover 12/14/02, 1:33 AM1

John F. Charles, Chair

STATE OF WASHINGTON

STSTSTSTSTAAAAATE INVESTMENT BOTE INVESTMENT BOTE INVESTMENT BOTE INVESTMENT BOTE INVESTMENT BOARDARDARDARDARD2424 Heritage Court SW - P.O. Box 40916 - Olympia, Washington 98504-0916

(360) 664-8900 - FAX (360) 664-8912

June 30, 2002

To All Stakeholders:

I am pleased to submit the Washington State Investment Board’s (WSIB) Annual Report for fiscal year 2002.This is our twenty-first annual report.

As of June 30, 2002, retirement fund assets totaled almost $40 billion, including $944 million in self-directeddefined contribution funds. After a decade in which the retirement funds consistently posted double-digitinvestment gains, fiscal year 2002 marked the second consecutive year that the defined benefit retirementfunds posted negative returns (-6.4 percent in fiscal year 2002). However, the silver-lining is that, as ofJune 30, 2002, the WSIB Retirement Funds have outperformed their public fund peers over the three-yearand five-year time periods, as measured by the Trust Universe Comparison Service (TUCS) universe ofpublic pension funds greater than $1 billion in size.

The past two years have been a period of upheaval in equity markets world-wide, in which virtually allinvestors have experienced losses within their investment portfolios. In this past year alone, shaken by theattacks of September 11, 2001, and the discovery of a series of corporate accounting scandals, investorssuffered through two of the worst quarters in the U.S. equity market since 1926. When compared with thereturns of major stock indices like the S&P 500 (-18.0 percent) and the Wilshire 5000 (-16.6 percent), theWSIB’s retirement fund performance highlights the benefits of a broadly diversified portfolio — a strategywhich moderates extreme movements in any single investment market.

For the second consecutive year, portfolios with heavy emphasis on fixed income securities posted stronginvestment performance. The various Industrial Insurance funds posted positive returns of up to 9.2 percent,and the Permanent funds posted positive returns between 6.5 and 6.9 percent.

During this past year, the WSIB adopted new long-term asset allocation policy targets for the defined benefitretirement funds, increasing the target allocation to the Private Equity asset class from 15 to 17 percent andthe allocation to Real Estate from nine to 12 percent. The target allocation to U.S. equities declines from36 to 31 percent. Also this year, the third, and potentially largest, state hybrid defined contribution retirementplan, the Public Employees’ Retirement System Plan 3 (PERS 3) began . The growth of defined contribution-type investment programs, such as PERS 3, and the more treacherous investment environment will presentnew challenges for the WSIB. However, I am certain that the hard-working and dedicated Board and itsstaff will continue to create and implement successful investment programs for the many and varied fundsunder the WSIB’s management.

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Part 2 of the Annual Report, “Financial Statements and Schedules of Investments,” is an integralpart of this Annual Report. It contains detailed listings of WSIB’s investment holdings.

Twenty-First Annual Investment Report (Part 1)

ContentsHighlights of Fiscal Year 2002Washington State Investment Board OverviewBoard-Established CommitteesBoard MembersWashington State Investment Board StaffInvestment ResponsibilityAssets Under ManagementWashington State Investment Board BudgetAnnual Financial ReportInvesting in WashingtonDefined Benefit Retirement Funds

Retirement PlansAsset ChangesRetirement Fund PerformanceInvestment Growth and ReturnsAsset AllocationU.S. Equity ProgramNon-U.S. Equity ProgramFixed Income ProgramPrivate Equity ProgramReal Estate Program

Defined Contribution Retirement PlansPublic Employees’ Retirement System Plan 3School Employees’ Retirement System Plan 3Teachers’ Retirement System Plan 3Judicial Retirement AccountDeferred Compensation Fund

State Investment Board Daily-Valued FundsWashington State Horizon FundsWashington State Bond FundSavings Pool

Industrial Insurance FundsPermanent Funds & Other Trust Funds

Permanent FundsOther Trust Funds

Glossary

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10111315161718192022242829313334353637414344454753555658

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HIGHLIGHTS OF FISCAL YEAR 2002

� Total assets managed by the Washington State Investment Board (WSIB) stood at $50.9 billionon June 30, 2002, with 32 individual state funds managed by the WSIB. Fiscal year 2001 wasthe second consecutive year in which equity markets world-wide experienced precipitousdeclines. Shaken by the September 11, 2001, terrorist attacks and later by a series of corporateaccounting scandals, the U.S. equity market suffered through two of the worst quarters since1926 during this past fiscal year. Major U.S. stock market indices experienced double-digitdeclines, with the S&P 500 down 18 percent and the Wilshire 5000 off nearly 17 percent forthe fiscal year.

� The defined benefit Retirement Funds returned -6.4 percent in fiscal year 2002. During thepast fiscal year, the WSIB adopted new long-term asset allocation policy targets for thedefined benefit retirement funds, increasing the target allocation to Private Equity from 15to 17 percent and the target allocation to Real Estate from nine to 12 percent. Thelong-term target allocation to U.S. equities was decreased from 36 to 31 percent.

� As of June 30, 2002, the Retirement Funds have outperformed their public fund peers overthe three-year and five-year time periods, as measured by the Trust Universe ComparisonService (TUCS) universe of public pension funds greater than $1 billion in size.

� The four individual Industrial Insurance Funds each recorded positive returns in fiscal year2002, with the highest being the 9.2% return of the Pension Reserve Fund.

� For the Permanent Funds, accrued earnings for distribution to beneficiaries totaled$42.8 million in fiscal year 2002.

� Defined contribution-type assets stood at $3.5 billion in five separate programs: the stateDeferred Compensation Plan, the Judicial Retirement Account, the School Employees’Retirement System Plan 3, the Teachers’ Retirement System Plan 3, and the new PublicEmployees’ Retirement System Plan 3, which began on March 1, 2002.

� The WSIB received its tenth consecutive unqualified state audit (for fiscal year 2001).

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WASHINGTON STATE INVESTMENT BOARD

The WSIB was created by statute in 1981 to “. . . exercise all the powers and perform all duties prescribedby law with respect to the investment of public trust and retirement funds.” The law goes on to state“. . . the State Investment Board shall have full power to invest, reinvest, manage, contract, or sell orexchange investments acquired.”

As of June 30, 2002, the WSIB has management responsibility for 32 funds, which are categorized aseither retirement funds (defined benefit and defined contribution), deferred compensation funds, industrialinsurance funds, permanent funds, or other trust funds. The Board is composed of nine voting membersand five non-voting members. A tenth voting Board member, representing active members of the SchoolEmployees’ Retirement System, will be added in September 2002.

Although governed by an independent board, the WSIB is part of the Executive branch of state government.As a state agency, Board members and staff are required to comply with all statutory requirements andrules established for all agencies, officials, and employees in the performance of their public duties.

In order to efficiently analyze investment issues, specific areas of responsibility have been assigned toCommittees of the Board. The Committees consist of selected Board members and act as extensions ofthe Board. Their functions are to analyze investment issues under their jurisdiction in greater detail thanwould be possible for the full Board. Recommendations are brought to the Board at regular meetingdates for a full Board vote.

Investment Principle

“The State Investment Board shall invest and manage the assets entrusted to it with reasonable care, skill, prudence, anddiligence under circumstances then prevailing which a prudent person acting in a like capacity and familiar with suchmatters would use in the conduct of an activity of like character and purpose.” (RCW 43.33A.140)

“The Board shall consider investments not in isolation, but in the context of the investment of the particular fund as awhole and as part of an overall investment strategy, which should incorporate risk and return objectives reasonably suitedfor that fund.” (RCW 43.33A.140)

“The Board shall establish investment policies and procedures designed exclusively to maximize return at a prudent levelof risk.” (RCW 43.33A.110)

Mission Statement

To invest and to manage the entrusted funds in a manner consistent with statutes, regulations, Board policies and thehighest standard of professional conduct for the exclusive benefit of fund beneficiaries.

2

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WASHINGTON STATE INVESTMENT BOARD

Even with a highly skilled, professional staff, the Board also relies on a variety of outside experts toprovide advice and counsel, as well as specific investment services. The following list includes the consultantsand advisors currently utilized by the Board.

Money management firms hired by the Board to manage specific portions of the equity portfolio, andother assets managed by general partners in private equity and real estate, are listed on the pages describingthose specific investment programs.

Legal Services

� Attorney General of Washington� Foster, Pepper & Shefelman - Seattle, WA� Goodwin Procter - Boston, MA� Orrick, Herrington & Sutcliffe -

New York, NY� Preston, Gates & Ellis - Seattle, WA� Song & Mondress - Seattle, WA� Testa Hurwitz & Thibeault- Boston, MA� Paul, Hastings, Janofsky & Walker -

Los Angeles, CA

Master Custodian Bank

� State Street Bank - Boston, MA

Private Equity Consultant

� Pacific Corporate Group - La Jolla, CA

Real Estate Consultant

� Courtland Partners - Cleveland, OH

Insurance Portfolio Consultant

� Conning Asset Management - Hartford, CT

Investment Accounting Data System

� Financial Control Systems - Chadds Ford, PA

General Investment Consultants

� Pension Consulting Alliance - Encino, CA� Callan Associates - Denver, CO� R.V. Kuhns & Associates - San Fransisco, CA� Watson-Wyatt Investment Consulting -

San Francisco, CA

The Board has established four Committees which are appointed by the Chair and approved by theBoard as follows:

AdministrativeThis Committee is responsible for organizational,personnel, budget, legal issues, and legislative issues,as well as strategic asset allocation matters.

AuditThis Committee oversees audit activities andoperations, and nominates candidates for the non-voting positions on the Board. In addition, the AuditCommittee develops and monitors the Code ofConduct for the Board, reviews performancereporting requirements, and deals with corporategovernance policies and issues.

Private MarketsThis Committee is responsible for development ofpolicy and structure for private market investments(real estate, venture capital, leveraged buyouts, etc.),and reviews real estate and private equity investmentsfor recommendations to the Board.

Public MarketsThis Committee is responsible for the developmentof policy and structure for public market investments(fixed income, domestic equity, international equity),and reviews individual equity managers forrecommendation to the Board.

3

OUTSIDE HELP AND ADVICE

BOARD-ESTABLISHED COMMITTEES

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STATE INVESTMENT

Ex-Officio Board Members

Michael J. Murphy State Treasurer

John F. Charles, Chair Director, Department of Retirement Systems

Gary Moore Director, Department of Labor and Industries

Board Members Appointed by the Governor

Vacant Representative - Active Member, PublicEmployees’ Retirement System

George Masten Representative - Retired Member of a StateRetirement System

Patrick McElligott Representative - Active Member, LawEnforcement Officers’ and Fire Fighters’Retirement System

Board Member Appointed by the Superintendent of Public Instruction

Lee Ann Prielipp, Vice-Chair Representative - Active Member, Teachers’Retirement System

Board Member Appointed by the Speaker of the House

Helen Sommers State Representative

Board Member Appointed by the President of the Senate

Sid Snyder State Senator

Non-Voting Board Members Appointed by Voting Board Members

Jeffrey Hanna Investment Professional

Charles Kaminski Investment Professional

John Magnuson Investment Professional

Robert S. Nakahara Investment Professional

Jeffrey Seely Investment Professional

Board members as of June 30, 2002

BOARD MEMBERS

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STATE INVESTMENT BOARD STAFF

SENIOR INVESTMENT OFFICERS

William P. Kennett, CFAFixed IncomeFormerly a securities analyst at the Montana Boardof Investments. Graduate of the University ofMontana with an MBA and a BS in BusinessAdministration.

Nancy Calkins, CIMAPublic EquityFormerly Investment Officer for CALPERS, domesticand international external equity manager relations.Graduate with honors Master of Arts in Economicsand Business Administration from California StateUniversity, Sacramento.

Jeffrey A. HabersetzerReal EstateFormerly worked in the real estate related fields offee appraisal and title insurance, and as a commercialsales and leasing associate. Graduate of Universityof Washington in Business Administration.

Thomas E. RuggelsPrivate Equity

Formerly an Investment Officer in both public andprivate equity and Investment Accounting Controllerfor the SIB. Graduate of the University of Kansasin Accounting with an MBA from the University ofWashington.

EXECUTIVE STAFF

Beth Vandehey, CPAInternal Auditor

Melanie WatnessHuman Resources Administrator

Gary Bruebaker, CFA, CPAChief Investment Officer, and Acting ExecutiveDirector

Twenty-four years in executive management andpublic finance. Formerly Deputy State Treasurerof Oregon. Served as the President of theGovernment Finance Officers Association of theUnited States and Canada. Graduate of theUniversity of Oregon with an MBA and a graduateof Oregon State University with honors in businessadministration. Chartered Financial Analyst,Certified Cash Manager and Certified PublicAccountant.

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Les Brodie, CGFMActing Deputy Director for Operations

Twenty years of experience in federal, state andcounty government. Prior positions include:Comptroller, Deputy Auditor of Finance, SeniorFiscal Analyst with the Washington House ofRepresentatives and Auditor with the U.S. GeneralAccounting Office. MPA graduate from CaliforniaState University at Los Angeles and a Bachelor ofArts graduate from the University of SouthernCalifornia. Certified Government Financial Manager.

Executive SupportSheila Geisler,

Executive AssistantKristi Bromley,

Administrative Assistant for InvestmentsKristi Walters,

Administrative Assistant for OperationsGeri Uhlmeyer,

Office Assistant

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STATE INVESTMENT BOARD STAFF

OPERATIONS STAFF

INVESTMENT STAFF

6Staff as of September 2002

Business ServicesSandra Joudrey, CPA, Financial ManagerDavid Thatcher, Contract SpecialistKathy Butler, Administrative AssistantJack Coleman, Chief AccountantRegina Cuccia, Secretary SeniorWendy Harris, Financial AnalystMeenu Kushan, Fiscal TechnicianRenee Long, Financial Specialist

Systems and Office ServicesJim Lee, Systems and Office Services ManagerTom Edwards, LAN AdministratorBill Duris, Systems AnalystBrad Christoffer, PC Support SpecialistPatricia Sheridan, Office ManagerTish Day, Office Assistant SeniorShauna Raphael, Office Assistant Senior

Asset AllocationDiana Will, CFA

Fixed IncomeThomas E. BosworthLinda EsauDonna May Ong, CFARalph RippleMaria S. Tosteson RosenJudy Yu

Private EquityIsabelle FowlerSam Green, CPAGary R. Holt

Portfolio AdministrationAlicia Markoff, Portfolio AdministratorMike Donovan, Assistant Portfolio AdministratorNelly Haun, Trade Settlement SpecialistBarbara Schoenthal, Trade Settlement Specialist

Investment AccountingSteven C. Verschoor, Investment Accounting ControllerSandra Machado, Investment Accounting SupervisorTami Clark, Investment AccountantMimi French, Investment AccountantVikki Gigstead, Investment AccountantKae Schmidt, Investment Accountant

Legislative and CommunicationsScott Huntley

Operations SupportE. Reneé Wicklund, Office Assistant Senior

Public EquityLinda L. Lester, CPA

Real EstateSteven M. DraperGary G. Gallinger

Investment SupportLinda Buchanan, Secretary AdministrativeElizabeth Hyde, Office Assistant SeniorBrian Shrader, Office Assistant Senior

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As of June 30, 2002, the WSIB has investment responsibility for the following 32 funds:

RETIREMENT FUNDS

DEFINED BENEFITPublic Employees’ Retirement System (PERS) Plan 1Public Employees’ Retirement System (PERS) Plan 2/3School Employees’ Retirement System (SERS) Plan 2/3Teachers’ Retirement System (TRS) Plan 1Teachers’ Retirement System (TRS) Plan 2/3Law Enforcement Officers’ & Fire Fighters’ (LEOFF) Plan 1Law Enforcement Officers’ & Fire Fighters’ (LEOFF) Plan 2Judicial Retirement SystemWashington State Patrol Retirement System (WSPRS)Volunteer Fire Fighters’ Relief & Pension Fund

DEFINED CONTRIBUTIONPublic Employees’ Retirement System Plan 3 (Self-Directed)School Employees’ Retirement System Plan 3 (Self-Directed)Teachers’ Retirement System Plan 3 (Self-Directed)Judicial Retirement Account

DEFERRED COMPENSATION PROGRAM FUNDSState Deferred Compensation Program

INSURANCE (LABOR & INDUSTRIES) FUNDSAccident FundMedical Aid FundPension Reserve FundSupplemental Pension Fund

PERMANENT FUNDSAgricultural Permanent FundCommon School Permanent FundMillersylvania Park Trust FundNormal School Permanent FundScientific Permanent FundState University Permanent Fund

OTHER TRUSTSDevelopmental Disabilities Endowment Trust FundGame and Special Wildlife FundGuaranteed Education Tuition FundRadiation Perpetual FundReclamation Revolving FundState Emergency Reserve FundState Employees Insurance Reserve

INVESTMENT RESPONSIBILITY

7

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Retirement

Self-Directed Defined Contribution

Deferred Compensation

Industrial Insurance Funds

Permanent Funds

Other Trusts

$ 39,026

944

1,353

8,636

684

289

$ 50,932

1993 1994 1995 1996 1997 1998 1999 2000

GROWTH OF ASSETSPast Ten Years

Fiscal Year Ending June 30, 2002

$ Billions

48.1

40.7

34.429.9

25.524.9

TOTAL ASSETS BY FUNDJune 30, 2002

(Millions)

ASSETS UNDER MANAGEMENT

8

52.9

2001

59.0

2002

60

55

50

45

40

35

30

25

20

15

10

5

0

55.350.9

Deferred CompensationSelf-Directed Defined ContributionPermanent & Other TrustsInsurance FundRetirement

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STATE INVESTMENT BOARD BUDGET

The WSIB is referred to as a “non-general fund” agency for budgetary purposes. The WSIB receives nostate general fund moneys; its funding comes from charges on the invested funds. These charges are spenton appropriated and non-appropriated expenses.

THE BIENNIAL BUDGET(Appropriated Expenses)

The WSIB follows the same budget process as anyother state agency. The Board receives a biennial(two-year) appropriation from the legislature, whichcovers normal department operations, includingstaff, facilities, equipment, supplies, etc.

The biennial budget is approved by the statelegislature every odd-numbered year. The biennialbudget funds the WSIB from July 1 of the odd-numbered year, following passage of the statebudget, to June 30 of the next odd-numbered year.

Like any other state agency, the WSIB cannotoperate in a deficit. The appropriated operatingexpenses are funded based on a formula establishedby statute whereby each fund invested by the WSIBpays a share proportional to the value of the assetsof the fund. The WSIB’s operating budget is tiny incomparison to the assets managed. Currently, thetwo-year operating budget is 0.026 percent of thetotal assets managed ($50.9 billion). For fiscal year2002, the appropriated operating expenditures were$6,062,400, or 0.012 percent of the total assetsmanaged.

INVESTMENT EXPENSES(Non-Appropriated)

Fees and expenses associated with the managementof investments typically include money manager,custodial bank, consultant, and legal fees specificallyrelated to an investment or group of investments.These expenses are classified as non-appropriatedexpenditures which do not require specific legislativeappropriation.

Statutory authority for these expenditures is codifiedin RCW 43.84.160, Investment counseling feespayable from earnings: “Investment counseling feesestablished by contract shall be payable from theinvestment earnings derived from those assets beingmanaged by investment counsel.”

For fiscal year 2002, total non-appropriatedexpenditures were $205,547,766, or 0.4 percent ofthe total assets managed.

Investment expenses in fiscal year 2002 grew due toincreased private equity and real estate commitments,and the inclusion of netted investment managementfees.

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WSIB Cost of Management($000)

Fiscal Year

199719981999200020012002

Total Assets

$40,654,325$48,060,437$52,870,990$58,868,551$55,298,357$50,931,946

Investment Expenses

$53,288 0.131%$51,715 0.107%$100,002 0.189%$138,573 0.235%$170,228 0.308%$205,548 0.403%

Operating Expenses

$4,008 0.010%$4,251 0.009%$4,922 0.009%$4,626 0.008%$5,569 0.010%$6,062 0.012%

Total Expenses

$57,296 0.141%$55,966 0.116%$104,925 0.198%$143,199 0.243%$175,797 0.318%$211,610 0.415%

% of totalassets

% of total assets

% of totalassets

130970_2.p65 12/4/02, 4:37 PM9

Fiscal Year Ended June 30, 2002Accrual Basis

ANNUAL FINANCIAL REPORT

3,296,209614,132803,096

1,154,165209,848

-(15,050)

6,062,400

417,0258,064,360

528,3553,288,5942,380,797

147,252,36124,814,648

132,5211,777,347

208,267946,034

7,356,076197,166,385

48,23557,912

116,16659,14783,905

365,366

150,00023,885

187,081165,139795,361282,653

1,604,119

1,1085,121,954

191,8863,8336,795

5,325,576

85014,98727,49160,515

982,4771,086,320

205,547,766

$ 211,610,166

276,14771,97426,544

(169,680)(31,818)

14,22815,050

202,445

3,572,356686,106829,640984,485178,03014,228

-

6,264,845

AppropriatedSalariesBenefitsPersonal ServicesGoods & ServicesTravelFixed AssetsInteragency Reimbursements

Subtotal Appropriated

Non-AppropriatedRetirement FundsU.S. Equity-PassiveNon-U.S. Equity - ActiveNon-U.S. Emerging Markets - PassiveNon-U.S. Emerging Markets - ActiveNon-U.S. Equity - PassivePrivate EquityReal EstateCommercial Mortgages (Fixed Income)General Pension ConsultantsLegal FeesCustodian Bank FeesSecurities Lending and Other FeesTotal Retirement

Self-Directed Defined Contribution FundsSelf-Directed Managers - Non U.S. EquitySelf-Directed Managers - U.S. EquityU.S. Fixed IncomeProvident Liquidity FeesSecurities Lending and Other FeesTotal Self-Directed Defined Contribution*

Industrial Insurance FundsConsultantsU.S. Equity - PassiveNon-U.S. Equity - PassiveCustodian Bank FeesSecurities LendingProvident Liquidity FeesTotal Industrial Insurance

Deferred Compensation FundsFixed Income - ActiveU.S. Equity - ActiveNon-U.S. Equity - ActiveU.S. Equity - PassiveSecurities LendingTotal Deferred Compensation Funds*

Permanent/Other FundsU.S. Equity - PassiveNon-U.S. Equity - PassiveCustodian Bank FeesSecurities LendingProvident Liquidity FeesTotal Permanent/Other Funds

Subtotal Non-Appropriated

TOTAL

$

$

$

$

$

$

$

$

$

$

$

$

$

$

$

$

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OBJECTS OF EXPENDITUREBUDGETTO DATE

EXPENDITURESTO DATE

BUDGETVARIANCE

*Expenses are paid by participants. Department of Retirement Systems (DRS) administrative costs borne by participants are not included.

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INVESTING IN WASHINGTON

Washington investments represent 3.3 percent of the total investments of the WSIB (all funds). Thisfigure compares favorably to the 2.2 percent figure that is the Washington economy’s share of the totalU.S. economy (Gross Domestic Product), as calculated by the U.S. Department of Commerce, Bureau ofEconomic Analysis.

In the public markets (public equity and fixed income), the WSIB portfolio contains equity share ownershipin and/or holds debt instruments issued by 118 publicly-held companies headquartered in the state ofWashington (as well as holding in-state mortgages and debt instruments issued by the state and variouslocal government units). The market value of these investments exceeds $950 million as of June 30, 2002.Among the many Washington companies represented in the WSIB public equity and fixed income portfoliosare:

While the WSIB continually seeks the best investment opportunitiesno matter where they might be located worldwide, the state ofWashington is home to many tremendous companies that offerthe WSIB excellent investment opportunities. Many Washingtoninvestments can be found in all of the WSIB’s investment portfolios.

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Washington Investments in the WSIB Portfolio

Investment ClassPublic EquityFixed IncomePrivate Equity*Real Estate*Total

$491.4$465.6

$61.4$667.3

$1,685.7

Airborne Inc.Amazon.Com Inc.Cascade Natural Gas Corp.Cell Theraputics Inc.Costco Wholesale Corp.Cutter & Buck Inc.Expedia, Inc.Expeditors InternationalFisher CompaniesGetty Images Inc.Icos Corp.Immunex Corp.Longview Fibre Co.Microsoft Corp.Nautilus Group Inc.

Nordstrom Inc.Paccar Inc.Plum Creek Timber Co.Puget Energy Inc.Safeco Corp.Seattle Genetics, Inc.Shurgood Storage CentersSonosite, Inc.Spacelabs MedicalStarbucks Corp.Todd Shipyards, Corp.Washington Federal Inc.Washington Mutual Inc.Weyerhaeuser Co.Zymogenetics Inc.

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*The private equity total shown is the amount invested in Washington-based companies by theWSIB. The real estate total shown is the estimated fair market value of Washington propertiesheld by real estate partnerships in which the WSIB participates.

Value($Millions)

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Perhaps the most direct impact the WSIB investments might have on the Washington economy is inprivate equity ownership. As of June 30, 2002, the WSIB has over $61 million invested in 69 Washingtoncompanies through its private equity partnerships. Some of the private equity portfolio companiesheadquartered in Washington include:

Several of the WSIB’s real estate partners and managers have acquired or manage assets located inWashington. As of June 30, 2002, the WSIB portfolio includes whole or partial ownership of 30 office,retail or industrial properties located in Washington. The fair market value of these properties is estimatedat over $667 million. The following are some examples:

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Merrill GardensMetawave CommunicationsnLight Photonics Corp.Phycom Corp.Reflex CommunicationsRendition NetworksRestaurants UnlimitedSkeleTech, Inc.Spiration, Inc.Talisma Corp.Tera BeamTidewater HoldingsVivatoWestern Inst. Review BoardYour Pet’s Choice

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Airspan NetworksApar Holding Corp.Asterion.comAventail Corp.Avenue ABroadstream Corp.Calypso Medical TechCaptura SoftwareCobalt Group, Inc.Cybersafe Corp.edge2net, Inc.F5 Networks, Inc.iCopyright.comInterNAP Network ServicesLizard Tech, Inc.

INVESTING IN WASHINGTON

� 1551 Eastlake Avenue - Seattle� 1616 Eastlake Avenue - Seattle� 2100 Evergreen Parkway - Olympia� Bellevue Galleria - Bellevue� Burke & Phinney Buildings - Seattle� Columbia Technology Center - Vancouver� Covington Square - Covington� Fairwood Shopping Center - Renton� One & Two Union Square - Seattle� Pacific Business Park North - Kent� Southcenter Corporate Square - Seattle

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130970_2.p65 12/3/02, 6:23 PM12

DEFINED BENEFIT RETIREMENT FUNDS

Retirement PlansAsset ChangesFund PerformanceInvestment Growth and ReturnsAsset Allocation

U.S. Equity ProgramNon-U.S. Equity ProgramFixed Income ProgramPrivate Equity ProgramReal Estate Program

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130970_2.p65 12/3/02, 6:23 PM13

130970_2.p65 12/3/02, 6:23 PM14

The Department of Retirement Systems (DRS) is the administrative arm of the state’s multiple-employerretirement systems. Headed by a cabinet-level director, who also serves as a voting member of the WSIB,DRS administers the pension plans for state employees, teachers and classified educational employees; lawenforcement officers and fire fighters; and other employees of participating local political subdivisions.

The retirement system membership has grown to 414,417 members as of June 30, 2002, including 26,469inactive members.

In fiscal year 2002, the sum of trust fund contributions, fees and investment returns was -$2,114 million(including Plan 3 Self-Directed Defined Contribution). This includes positive revenues of $410 million inmember contributions and restorations, $262 million in employer contributions, $22 million in GeneralFund contributions, and $28 million in fees and other revenue, countered by -$2,836 million in investmentlosses.

RETIREMENT PLANS

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RETIRED MEMBERS BY SYSTEM

TRS66,22023.4%

ACTIVE MEMBERS BY SYSTEM MARKET VALUE AS OF JUNE 30, 2002(In $000’s)

PERS152,93653.9%

Judicial27

0.0%LEOFF14,9005.3%

State Patrol1,0270.4%

PERS 1

PERS 2/3

SERS 2/3

TRS 1

TRS 2/3

LEOFF 1

LEOFF 2

WSP

Vol FF

JUDICIAL

TOTAL

8,992,176

9,482,252

1,564,986

7,679,311

3,918,704

4,418,004

2,266,534

595,580

100,312

8,177

39,026,036

$

$

PERS62,18959.5%

StatePatrol

6960.7%

TRS33,10731.7%

LEOFF8,0787.7%

Judicial152

0.1%

SERS48,34717.0%

SERS269

0.3%

130970_2.p65 12/3/02, 6:24 PM15

Over the past ten years, the assets of the Retirement Funds have grown from $16.4 billion to $39.0 billion(as of June 30, 2002), not including Plan 3 Self-Directed Defined Contribution. This growth is comprisedof employer and employee contributions, net investment returns, less benefit payments and fund transfers.

Employer contributions are driven by the obligation of the employer to fund the plan in a systematic anddeliberate manner consistent with actuarial projections, existing statutes and availability of funds. Theemployee contributions are the most predictable component since they are statutory and less likely tochange. Benefit payments are withdrawn from the funds to provide monthly stipends to retired members.

Investment returns are primarily the result of asset allocation and capital market returns. The WSIB hasno control over capital market returns; it does, however, have control over the Retirement Fund’s assetallocation, investment strategies, risk-return objectives, and certain investment decisions. The asset allocationpolicy is reviewed regularly and revised when appropriate. (See the Asset Allocation section on page 19).

ASSET CHANGES

Note: Investment earnings include Plan 3 Self-Directed investments. Source of data: WSIB and DRS.

16

Factors Affecting Trust Fund Balances(in Millions)

Net of Contributions and Benefit Payments

Investment Earnings

$6,000

$5,000

$4,000

$3,000

$2,000

$1,000

$0

$-1000

$-2000

$-3000

-348

5,357

4,052

-2,827

5,361

167

-1,054

-120

4,327

-523

5,614

Fiscal Year

-2,836

3,164

390

2,144

202 200 180

-852

1996199519941993 1997 1998 1999 2000 2001 2002

324

130970_2.p65 12/3/02, 6:24 PM16

RETIREMENT FUND PERFORMANCEThe WSIB measures its performance by the achievement of expected returns on the assets undermanagement, and comparisons to appropriate benchmarks.

An important part of the asset allocation policy process is to set an expectation for performance of theindividual asset classes, as well as the Retirement Fund as a whole. Although returns will vary quarterly andannually, the long-term expectation should exceed the actuarially assumed rate over time.

Assets differ in their behavior and volatility. For example, since most public market investments can bepriced instantaneously, fair market value can be determined with certainty. However, the real estate andprivate equity investments are very illiquid, are not easily priced, and may take years before offering theexpected return to the investor. These characteristics must be kept in mind when reviewing quarterly andannual returns.

The nine largest defined benefit retirement funds are invested through the Retirement Commingled TrustFund (CTF). The CTF serves to pool the assets of the nine separate funds in order to provide for moreefficient management and reduce administrative costs and investment fees.

* TUCS returns have been adjusted to reflect fees equivalent to those incurred by WSIB.

17

Five Years

5.5%

4.9

3.3%

4.8

7.3%

7.6

3.9%

3.6

-1.8%

-1.7

11.2%

14.5

8.9%

8.7

One Year

-6.4%

-6.2

1.9%

2.6

6.6%

8.6

-16.9%

-16.6

-7.4%

-8.2

9.8%

8.6

-12.9%

-13.0

------------------Annualized----------------

TOTAL FUNDTUCS Public Fund > $1 Billion Median*

LIQUIDITY90 Day Treasury Bill

FIXED INCOMELehman Aggregate Bond Index

U.S. EQUITYWilshire 5000 Index

NON-U.S. EQUITYMSCI ACWI Free (ex. U.S.) Index

REAL ESTATENCREIF Property Index + 200 basis points

PRIVATE EQUITYS&P 500 + 500 basis points

Three Years

0.2%

-0.6

1.8%

4.6

7.7%

8.1

-7.7%

-8.2

-3.7%

-6.2

11.6%

12.0

4.4%

-4.2

RETIREMENT COMMINGLED TRUST FUNDTime-Weighted Returns - Restated

Periods Ending June 30, 2002

130970_2.p65 12/3/02, 6:24 PM17

RETIREMENT FUND HISTORICAL RATES OF RETURNFiscal years ending June 1993 to June 2002

INVESTMENT GROWTH AND RETURNSRETIREMENT FUND HISTORICAL MARKET VALUES

Fiscal years ending June 1993 to June 2002

18

$Billions

99989796959493 00

37.432.5

26.822.7

19.318.9

39.0

50454035302520151050

41.8

01

12.4

17.6

20.520.0

17.416.616.4

2.21.6

14.1

-6.4-6.2-6.0-6.3

16.6

0099989796959493

20%

15%

10%

5%

0%

-5%

-10%

TUCs Public Fund $1B Median

WSIB

10.711.9

01

02

46.5

14.2

9.5

43.0

02

16.5

130970_2.p65 12/3/02, 6:24 PM18

Asset allocation is the driver of investment performance. Research consistently shows that a plan’s asset allocationexplains over 90 percent of the variation in investment return. Accordingly, the WSIB spends considerable time andeffort developing, monitoring, and adjusting the asset allocation of the retirement fund portfolio. To control therisk of the asset mix, the Board has established tight policy ranges around each asset class. By placing the fund’sassets in several investment areas, the Board reduces the overall investment risk. The retirement fund is spreadacross five basic asset types. The following pages outline how each asset type is further diversified in line with theBoard’s mandate of a maximum rate of return at a prudent level of risk.

The Board has established a long-term plan based, in part, upon historical average investment returns. The Boardformally reviews the plan every four years. The most recent asset allocation study was completed in the fourthquarter of 2001.

The actual asset mix is monitored continuously by staff and is reported monthly to the Board. The investment staffhas directed several shifts during the fiscal year to move back toward the policy targets. This resulted in the fundtaking profits at key times in the fixed income and non-U.S. equity markets. Both real estate and private equity haveopen contractual commitments to top tier investment partners that will move them toward their long-term targetsover the next three to four years. As of June 30, 2002, private equity had open commitments of $5.7 billion and realestate had open commitments of $917 million. It is expected that these commitments will be called over the nextthree to four years. The capital to fund these commitments will most likely come from distributions received fromprevious investments, and then from U.S. and non-U.S. equity and the fixed income portfolio.

ASSET ALLOCATION

19

RETIREMENT COMMINGLED TRUST FUNDJune 30, 2002

$

$

$

$

U.S. EquityFixed IncomeNon-U.S. EquityPrivate EquityReal EstateLiquidityTotal CTF

Plan Specific Investments*

Total Retirement Funds

12,970,63210,924,0475,848,1335,124,9813,610,785

498,48838,977,066

48,970

39,026,036

ASSET CLASS

31%25%15%17%12%0%

+/- 5%+/- 4%+/- 3%+/- 4%+/- 2%

0-2%

33.328.015.013.19.31.3

Unallocated funds targeted for Private Equity and Real Estate are invested in U.S. Equities and Fixed Income, respectively.

* Plan-Specific Investments are short-term investment funds for each of the separate retirement plans.

IN 000’S PERCENTPOLICYRANGE

LONG-TERMPOLICYTARGET

ALLOCATION

130970_2.p65 12/3/02, 6:24 PM19

U.S. EQUITY PROGRAM

THE PROGRAM

The U.S. equity portfolio is structured to capture the returns of the broad U.S. equity market. TheWSIB uses a passively-managed U.S. Equity Market Index Fund to provide broad market exposuresimilar to the Wilshire 5000 index. The index measures the performance of all U.S. headquarteredequity securities with readily available price data. Over 5,800 capitalization-weighted security returnsare used to calculate the index.

As of June 30, 2002, the defined benefit retirement funds had almost $13 billion invested in theU.S. Equity Market Index Fund. Just over 78 percent of the portfolio consisted oflarge-capitalization (large-cap), S&P companies. The remaining 22 percent of the index wascomprised of mid-capitalization and small-capitalization companies. Accordingly, the large-capcomponent of the WSIB U.S. equity portfolio totaled $10.1 billion, while the small-/mid-capcomponent represented $2.8 billion.

FISCAL YEAR HIGHLIGHTS

Equity markets remained sluggish in the final half of 2001, as the market struggled to try toconvince investors that the economy would recover by year-end. Consumer confidence,unemployment and Gross Domestic Product (GDP) reports pointed to weakness throughoutthird quarter 2001. Just when investors thought the damage couldn’t get any worse, terroristattacks knocked the already fragile U.S. economy down even further. The U.S. equity markets wereclosed for four consecutive days following the attacks, the longest trading disruption since theGreat Depression. The S&P 500 fell 11.6 percent in the week the markets re-opened, which wasthe largest weekly decline since the Great Depression.

Some bargain-hunting took place in the final quarter of 2001, helping equities recover some of thelosses. Investors started to see the initial stages of an economic recovery as durable goods ordersand positive earnings announcements by select companies suggested the likelihood of a recoveryin early 2002. However, investor confidence was further shaken when Enron shocked the marketin December by filing the largest bankruptcy in U.S. history after revealing that it had vastly overstatedits financial results by hiding losses.

The landscape briefly shifted early in 2002, as positive economic news signaled the potential endof the recession. However, corporate governance issues shattered investor confidence and pushedshare prices even lower after several accounting scandals surfaced. First quarter GDP growth of6.1 percent was not enough to accelerate the recovery. Consumer confidence and retail sales bothturned negative, further jeopardizing prospects for a quick recovery. The Wilshire 5000 indexended the fiscal year down 16.6 percent. The Wilshire 4500 returned -13.3 percent during the last12 months, while the S&P 500 declined 18 percent. The overall return of the WSIB’s U.S. equityportfolio was -16.9 percent for the fiscal year.

20

130970_2.p65 12/3/02, 6:24 PM20

0.9 1.49 3,639

U.S. EQUITY PROGRAMU.S. EQUITY MARKET INDEX FUND DETAIL

June 30, 2002

Fund Makeup by Exchange

NYSEAmexNASDAQ

1,694464

3,682

81.30.5

18.2

ExchangeNumber ofCompanies

% of FundMarket Value

Issue NameMicrosoft CorporationGeneral Electric CompanyExxon Mobil CorporationWal-Mart Stores Inc.Pfizer Inc.Citigroup Inc.American International Group Inc.Johnson & JohnsonThe Coca-Cola CompanyInternational Business Machines Corporation

Top Ten Holdings

2.542.482.382.101.871.711.531.351.191.06

2.622.552.452.161.931.761.571.391.231.09

Fund (%) Wilshire 5000 (%)

Sector DiversificationSector Type

Basic MaterialsCommunicationsConsumer, CyclicalConsumer, Non-cyclicalDiversifiedEnergyFinancialIndustrialTechnologyUtilitiesOther

Total

3.010.111.322.70.07.1

21.59.8

11.62.90.0

100.0

2.810.311.422.90.06.3

21.79.8

11.92.90.0

100.0

Fund (%) Wilshire 5000 (%)

Beta versus S&P 500Fund yield (%)Number of issues in fund

Statistic

Fund Summary Statistics

Description

21

130970_2.p65 12/3/02, 6:24 PM21

NON-U.S. EQUITY PROGRAM

THE PROGRAM

As of June 30, 2002, the non-U.S. equity program totaled $5.8 billion and represented 15.0 percent of thetotal retirement fund.

The non-U.S. equity program includes investments in both international developed and emerging markets.The program is benchmarked against the market value weighted, Morgan Stanley Capital International(MSCI) All Country World Free Index (ACWI), excluding the United States.

For the developed markets, the program has a 50 percent active/50 percent passive target mix. Theprogram structure integrates all the developed markets international markets, using investment firms thatmanage money in Europe, Australia, and the Far East (EAFE), as well as Canada. The actively-managedportion of the developed markets program consists of six active international equity investment firms,which were hired in mid-1999: Artisan Partners, Delaware International Advisers, Dresdner RCM GlobalInvestors, Nicholas Applegate Capital Management, Putnam Investments and Pyrford International. Onan opportunistic basis, these firms also are allowed to invest up to ten percent of the assets in emergingmarkets. The other half of the developed markets program is invested passively by State Street GlobalAdvisors, which replicates the MSCI EAFE + Canada index.

As of June 30, 2002, the emerging markets component was 9.2 percent of the Non-U.S. Equity Programand totaled approximately $537 million. Four firms actively manage 78 percent of the emerging marketscomponent: Capital International, F & C Emerging Markets, Grantam Mayo van Otterloo & Company,and Schroder Capital Management. State Street Global Advisors manages the remaining 22 percent ofthe emerging markets program, using a liquidity tier index strategy.


Non-U.S. equity portfolio returns for fiscal year 2002 were a negative 7.3 percent, outperforming theMSCI ACWI ex U.S. index return of negative 8.3 percent. The WSIB’s developed market portfolio’sreturn of negative 7.9 percent outperformed the MSCI EAFE + Canada Index return of negative9.4 percent. Strength in the Pacific region and the decline in the U.S. dollar helped to support returnsfrom these markets, relative to domestic market returns.

Emerging markets performed better than developed markets during the fiscal year endingJune 30, 2002. However, the WSIB’s total emerging market portfolio return of negative1.1 percent under-performed the IFC Investable Index of positive 3.7 percent. The Board hasapproved a change in the emerging markets benchmark, for fiscal year 2003, to the MSCIEmerging Markets Free Index. This will standardize the international benchmarks to the MSCIfamily of indexes.

22

130970_2.p65 12/3/02, 6:24 PM22

$ 357,768 747,129 449,168 226,013 569,718 289,061

$ 2,638,857

$ 2,672,374

$ 5,311,231

$ 130,97490,481

113,48686,509

$ 421,450

$ 115,452

$ 536,902

$ 5,848,133

NON-U.S. EQUITY PROGRAMALLOCATION TO NON-U.S. EQUITY

June 30, 2002

23

DEVELOPED MARKETS

Active ManagersArtisan PartnersDelaware International AdvisorsDresdner RCM Global InvestorsNicholas Applegate Capital ManagementPutnam InvestmentsPyrford International PLC Total Active

Passive ManagerState Street Global Advisors

Total Developed Markets

EMERGING MARKETS

Active Emerging Markets ManagersCapital International Inc.F & C Emerging Markets, Ltd.Grantham Mayo van Otterloo & Co.Schroder Capital Management

Total Active Emerging Markets

Passive ManagerState Street Global Advisors

Total Emerging Markets

TOTAL NON-U.S. EQUITY

MARKET VALUE(IN 000’S)

130970_2.p65 12/3/02, 6:24 PM23

Fixed income securities constitute an important component of the portfolios of most institutionalinvestors. Several factors make these instruments attractive in a pension portfolio. Fixed incomesecurities offer diversification from a pure equity portfolio and represent an excellent source ofliquidity. Less risky than equities, fixed income securities help control the overall portfolio volatility.

The domestic fixed income program is internally managed by WSIB staff with the Lehman AggregateIndex as the performance benchmark (the performance benchmark will be changed to the LehmanUniversal Index effective July 1, 2002). The WSIB may invest in the following fixed incomeinstruments:

FIXED INCOME PROGRAM

THE PROGRAM

24

The fixed income management strategy is primarily one of sector selection. The portfolio isstructured to be overweighted or underweighted relative to the index’s major sectors: Treasuries,Agencies, Credits, MTG and ABS. As of June 30, 2002, the portfolio was underweighted relative tothe index in Governments and Mortgages, and overweighted in Credits and CMBS.

Not only is the total mortgage allocation lower than that of the index, about 70 percent of themortgages are comprised of collateralized mortgage obligations (CMOs), whose structure providesmore stable cash flows than standard pass-through mortgages.

Individual sector structures may also be overweighted or underweighted relative to that of theindex. For example, the corporate portfolio’s allocation to industry and credit rating differs fromthe index, as do the mortgage portfolio’s allocation to coupon and maturity.

Treasury and Agency debt have the highest credit rating since they are backed by either the U.S.Treasury or governmental agencies. Most mortgage debt has agency equivalent ratings, but somestructured product held may be Aaa or Aa. Investment grade corporate debt ranges from Aaa (thehighest) to Baa (the lowest). More than 40 percent of all investment-grade corporate debt issuedis A rated. The portfolio’s overall credit allocation reflects its large allocation to corporates, itscorporate concentration in Baa-rated companies, and the mortgage allocation to Agency and Aaa-rated structured mortgage product.

� U.S. treasuries (TSY) and government agencies(Agency)

� Treasury inflation protection securities (TIPS)� Investment-grade and high-yield credit bonds� Publicly traded mortgage-backed securities

(MTG)� Commercial mortgage-backed securities (CMBS)

� Privately-placed mortgages� Private placements of corporate debt� Convertible securities� Non-dollar bonds� Asset-backed securities (ABS)� Real estate mortgages

130970_2.p65 12/3/02, 6:24 PM24


Fixed income markets were plagued by uncertainty during fiscal year 2002. The questions regardingterrorism, the macro economy, earnings, accounting fraud and management ethics compelled a flightto quality. As a result, U.S. Treasury securities dramatically outperformed credit bonds.

The WSIB’s fixed income portfolio under-performed its benchmark, the Lehman Aggregate Index, bytwo percent for the fiscal year, returning 6.6 percent to the index’s return of 8.6 percent. Credit bonds,which were the portfolio’s largest allocation, returned 3.1 percent, compared to the 7.5 percent for theindex’s credit allocation.

The portfolio’s allocation to credit bonds started the year at 58 percent, but was reduced to 44 percentby the end of the fiscal year in reaction to the turbulent credit market. The portfolio’s allocationshifted to TIPS and to treasuries. TIPS started the fiscal year with an allocation of just four percent,but ended at about 12 percent. Treasuries started the fiscal year with an allocation of seven percentand ended at about 14 percent. TIPS posted a return for the fiscal year of 9.8 percent, while Treasuriesreturned 7.2 percent. WSIB’s mortgage allocation returned 10.5 percent, while the index’s mortgageallocation returned nine percent.

During the fiscal year, the WSIB portfolio’s duration averaged about ten percent longer than the durationof the Lehman Aggregate Index, and finished the fiscal year with a duration eight percent longer thanthat of the index.


25

SECTOR

Cash

Long - TermU.S. TreasuriesTIPSAgenciesCreditAsset-BackedCMBSMortgages

Total Long - Term

Total Fixed Income

$ 172,760

1,498,3091,256,563

376,3594,808,165

137,830768,581

1,905,481

$ 10,751,287

$ 10,924,047

ALLOCATION TO FIXED INCOMEJune 30, 2002

MARKET VALUE(In $000’s)

130970_2.p65 12/3/02, 6:24 PM25

CHARACTERISTICS OF THE FIXED INCOME PORTFOLIO June 30, 2002


26

Cash 1.6% 0.0%Treasury 13.7% 21.0%TIPS 11.5% 0.0%Agency 3.4% 12.4%Credit 44.0% 26.3%Asset-Backed 1.3% 1.7%CMBS 7.0% 2.2%Mortgages 17.4% 36.4% 100.0% 100.0%

SectorDistribution

WSIBPortfolio

LehmanAggregate

Index

CreditDistribution

WSIBPortfolio

LehmanAggregate

Index

MaturityDistribution

WSIBPortfolio

LehmanAggregate

Index

TSY 25.2% 21.2%AGY 14.4% 48.5%Aaa 17.0% 5.8%Aa 4.2% 4.8%A 11.2% 9.9%Baa 23.5% 9.8%Other 4.5% 0.0% 100.0% 100.0%

0 – 1 Year 3.8% 0.1%1 – 3 Years 14.7% 21.0%3 – 5 Years 15.7% 25.7%5 – 7 Years 20.0% 23.2%7 – 10 Years 24.1% 14.9%10 – 15 Years 5.1% 2.6%15 – 20 Years 3.3% 4.0%20 – 25 Years 3.6% 3.3%25+ Years 9.8% 5.2% 100.0% 100.0%

Top Ten IssuersMarket Value – June 30, 2002

$000United States TreasuryFNMA Structured MortgagesFHLMC Structured MortgagesFNMA Agency BondsMorgan Stanley CMBSGeneral Electric Capital CMOPemex & Pemex FinanceGMACFirst Union CMBSRFMSI CMO

0 – 4.9% 16.7% 9.8%5 – 6.9% 44.4% 54.5%7 – 7.9% 24.0% 23.9%8 – 8.9% 8.2% 8.0%9 – 9.9% 3.4% 1.9%10+% 3.4% 1.9% 100.0% 100.0%

0 – 1 Years1 – 3 Years3 – 4 Years4 – 6 Years6 – 8 Years8+ Years

CouponDistribution

WSIBPortfolio

LehmanAggregate

Index

EffectiveDuration

WSIBPortfolio

LehmanAggregate

Index

Moody’s credit ratings

4.4%25.0%20.1%22.6%17.3%10.6%

100.0%

1.8%33.7%24.8%18.2%

8.5%13.0%

100.0%

$ 2,755,423$ 594,463$ 450,931$ 250,802$ 172,450$ 160,144$ 157,054$ 149,814$ 140,575$ 139,009

130970_2.p65 12/3/02, 6:24 PM26

CREDIT SECTOR DETAIL June 30, 2002


Top Ten Credit HoldingsMarket Value – June 30, 2002

$000

Albertson’s Inc. – 8/01/09GMAC – 7/15/05U.S. Bank – 7/15/08Pemex – 10/13/10Washington Mutual – 4/01/10Vale Overseas – 3/08/07Pemex Finance – 8/15/17Household Finance – 1/30/07Petrobas Int’l. Finance – 7/06/11Utilicorp United – 7/15/04

SectorDistribution

WSIBCredit

Lehman AggCredit

$79,386$56,341$54,177$53,489$51,811$48,289$48,158$47,555$47,379$47,057

Industrial 48.4% 9.7%Utilities 15.5% 18.1%Financial 24.4% 36.7%Non-Corporate 11.7% 35.5%

100.0% 100.0%

Aaa 1.3% 9.7%Aa 9.5% 18.1%A 25.6% 36.7%Baa 53.4% 35.5%Other 10.2% 0.0% 100.0% 100.0%

0 – 1 Years 2.6% 0.1%1 – 3 Years 17.7% 22.4%3 – 4 Years 18.2% 16.7%4 – 6 Years 25.9% 22.2%6 – 8 Years 18.8% 19.8%8+ Years 16.8% 18.8% 100.0% 100.0%

EffectiveDuration

WSIBCredit

Lehman AggCredit

CreditDistribution

WSIBCredit

Lehman AggCredit

Top Ten Credit IssuersMarket Value – June 30, 2002

$000

Pemex & Pemex Finance $157,054GMAC $149,814Norfolk Southern $126,083Williams Companies $125,209Republic of Brazil $117,216Union Pacific Corporation $102,069Albertson’s Inc. $89,961Sprint Capital Corporation $85,080El Paso Energy Corporation $82,759CSX Corporation $78,642

CouponDistribution

WSIBCredit

Lehman AggCredit

MaturityDistribution

WSIBCredit

Lehman AggCredit

0 – 1 Year 2.6% 14.1%1 – 3 Years 11.5% 24.3%3 – 5 Years 24.3% 11.9%5 – 7 Years 11.9% 25.8%7 – 10 Years 25.8% 3.6%10 – 15 Years 3.6% 6.2%15 – 20 Years 6.2% 4.9%20 – 25 Years 4.9% 9.2%25+ Years 9.2% 0.0% 100.0% 100.0%

27

16.7%44.4%24.0%

8.2%3.4%3.4%

100.0%

9.8%54.5%23.9%

8.0%1.9%1.9%

100.0%

0 - 4.9%5 - 6.9%7 - 7.9%8 - 8.9%9 - 9.9%

10+%


130970_2.p65 12/3/02, 6:24 PM27

MARKET VALUE (In $000’s)

PRIVATE EQUITY PROGRAM

THE PROGRAM

Private equity investments range from leveraged buyouts of corporations to the investment of initialcapital in start-up enterprises. These investments are illiquid and very long-term in nature (up to 12 yearsor more). They are attractive to long-term institutional investors, because over long time horizons privateequity investment can offer higher returns than traditional public equity investments.

The objective of the WSIB’s private equity portfolio is to achieve, over the long term, annualized returnsof 400 to 600 basis points (or four to six percent) above the S&P 500 index. The WSIB’s asset allocationtarget for private equity is 17 percent of the total retirement fund. Over the past fiscal year, the Boardcommitted nearly $2.2 billion to private equity partnerships. The portfolio decreased in value from$5.73 billion to $5.12 billion during the past fiscal year, representing 13.1 percent of the retirement fund atfiscal year-end.

The portfolio is well-diversified by stage of investment, company size, and geographic location. Due tothe long-term and private nature of these investments, the valuations of these investments are based onconservative estimates. The true return on investment can only be accurately measured upon liquidationof the investment. Many investments are carried at original cost for considerable periods, until someevent allows for the estimation of a market value. Such events would include an initial public offering, asubsequent round of financing or a commitment to purchase the investment. The valuations contained inthis report are made by the general partners, and reviewed by the WSIB consultants and staff in accordancewith currently accepted accounting practices.

Since the inception of the program in 1981, the fund has achieved an annual 14.1 percent internal rate ofreturn (IRR), which is net of partnership fees and expenses. The IRR calculation is the industry standardmethod for investment performance. Time weighted returns, which represent performance independentof the timing of cash flows, are also calculated for the asset class. The time-weighted return for fiscal year2001 was -12.9 percent.

ALLOCATION TO PRIVATE EQUITYJune 30, 2002

SUB-ASSET CLASS

Large Corporate FinanceVenture CapitalInternationalDistressedSmall/Medium Corporate FinanceMezzanineOther

Total Private Equity

28

% of Private Equity

39.8%15.8%14.3%9.4%7.7%5.7%7.3%

100.0%

$2,038,773810,174731,972480,657397,677291,589374,139

$5,124,981

130970_2.p65 12/3/02, 6:24 PM28

REAL ESTATE PROGRAM

THE PROGRAM

The WSIB’s real estate program is an externally managed pool of select partnership investments,intended to provide alternative portfolio characteristics when compared to traditional stock andbond investments. The majority of the WSIB’s partnerships invest in institutional-quality realestate assets that are leased to third parties. The combination of income generated from bond-likelease payments, coupled with the hard asset qualities of commercial real estate, combine to generatereturns that are expected to fall between the return expectations for fixed income and equities. Thereal estate portfolio is managed to deliver risk-adjusted returns that are consistent with the Board’slong-term return expectations for the asset class. The WSIB’s real estate partnerships typicallyinvest in private real estate assets that are held for long-term income and appreciation. Many of theWSIB’s investment partnerships do not involve co-investment with other financial entities, therebyproviding the WSIB with control provisions related to liquidation, acquisition, and ongoingoperational decisions such as annual capital expenditures.

Volatility within the real estate portfolio is minimized through a combination of factors. First, themajority of the WSIB’s partners own commercial real estate assets in a private investment form,which is not subject to public market volatility. Second, real estate capital is diversified among ahost of partners with varying investment styles. Third, partnership assets are invested in numerouseconomic regions, including international markets, and in various property types. Fourth, WSIBpartners invest at different points within the asset’s capital structure and life cycle.

The WSIB’s current return objective for real estate calls for a target benchmark return of 100 to300 basis points (or one to three percent) above the NCREIF index. The portfolio’s value remainedconstant at $3.6 billion during the past fiscal year, and represented 9.3 percent of the total retirementfund. In November, 2001, the board completed an asset allocation study for the retirement fundwhich raised the long-term target allocation to real estate from nine percent to 12 percent. It isanticipated that this new allocation target will be met by the end of 2005.


Despite a slowing domestic economy, real estate performance posted attractive risk-adjusted returns.For the one-year period ending June 30, 2002, the WSIB’s real estate portfolio significantlyoutperformed the NCREIF Index, 9.8 percent to 6.6 percent.

29

130970_2.p65 12/3/02, 6:24 PM29

REAL ESTATE PROGRAM

ESTIMATED REAL ESTATE VALUEJune 30, 2002

ADVISOR / PARTNER

PM Realty AdvisorsPacific Realty AssociatesPacific Realty AssociatesLowe EnterprisesLowe EnterprisesJE Robert CompaniesSentinel Realty AdvisorsSecurity CapitalTA AssociatesMorgan StanleyMorgan StanleyMorgan StanleyTaylor Simpson GroupHudson AdvisorsHudson AdvisorsHudson AdvisorsHudson AdvisorsHancock Nat. Res. GroupHearthstoneHearthstoneTranswesternPRICOACherokee Investment ServicesING Realty AssociatesPrincipal FinancialCampbell Group

Total Investment Holdings

Net Accruals

Total Real Estate Equity

INVESTMENT

America West IIPactrustPac-SIBUnion SquareLowe NWJER Fund ISREFSecurity Capital GroupOlympia PropertiesMSREF III InternationalMSREF IV InternationalMSSSMCPILonestar ILonestar IILonestar IIILonestar IVForesTree WashingtonHearthstone Olympia Homebuilding PartnersMSIIHome Town AmericaEuropean Investor PropertiesCherokee Investment Partners IIING Realty PartnersPrincipal Enterprise CapitalHawthorne Timber Company

MARKET VALUE(In $000’s)

$

$

$

$

30

Regional Distribution Asset Type Distribution

Office45.3%

Residential11.0%

Retail11.9%Industrial

11.7%

Other20.1%

International 20.4%

46.3%12.5%

15.7%

5.1%

192296,315185,175393,509314,00775,3656,345

53,264382,304106,59095,0631,468

99,76218,25269,078

287,4397,194

76,549-3,87221,49641,554

198,69358,03384,423

427,050306,282

3,601,530

9,255

3,610,785

130970_2.p65 12/3/02, 6:24 PM30

DEFINED CONTRIBUTION RETIREMENT FUNDS

� Public Employees’ Retirement System Plan 3

� School Employees’ Retirement System Plan 3

� Teachers’ Retirement System Plan 3

� Judicial Retirement Account

31

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130970_2.p65 12/3/02, 6:24 PM32

PUBLIC EMPLOYEES’ RETIREMENT SYSTEM PLAN 3The WSIB is Trustee of the Public Employees’ Retirement System (PERS) Plan 3. The WSIB is responsible for the investmentof PERS Plan 3 assets and for the provision of self-directed investment options to members of the plan. The DRS isresponsible for plan administration, accounting, and record-keeping. PERS Plan 3 is the newest of the state’s hybrid definedcontribution retirement plans. PERS Plan 3 began March 1, 2002, with the first transfer period (for state and higher educationemployees) running from March 1 through August 31, 2002. The transfer period for local government employees will runfrom September 1, 2002, through May 31, 2003.

PERS Plan 3 Defined Contribution Assets and PerformanceJune 30, 2002

(In $000’s)

�The WSIB Total Allocation Portfolio (TAP) option, the statutory default option for PERS Plan 3, is invested in the Retirement Commingled Trust Fund.These moneys are included in the total for Retirement Funds shown elsewhere in this report. The remaining options are shown elsewhere in this report as self-directed defined contribution funds.

FUND PERFORMANCE

WSIB TAP OptionCustom Benchmark*

Short-Horizon FundCustom Benchmark‡

Mid-Horizon FundCustom Benchmark‡

Long-Horizon FundCustom Benchmark‡

U.S. Stock FundRussell 3000 Index

U.S. Large Stock FundS & P 500 Index

U.S. Small Stock FundRussell 2000 Index

International Stock FundMSCI EAFE Index

Bond FundLehman Intermediate Credit

Money Market90 Day T-Bill

ONE-YEAR

-5.2%-9.2%

-0.2% -0.1%

-4.6%-4.5%

-10.4%-10.2%

-17.4%-17.2%

-18.0% -18.0%

-8.4% -8.6%

-10.1%-9.5%

7.6% 7.7%

3.0% 2.6%

FIVE-YEAR

5.6%3.5%

**5.5%

**4.9%

**3.6%

**3.8%

3.7%3.7%

**4.4%

-1.8%-1.6%

**7.1%

5.3%4.8%

THREE-YEAR

0.1%-4.0%

**2.7%

**-0.4%

**-4.5%

**-7.9%

-9.2%-9.2%

1.9%1.7%

-7.4%-6.8%

**7.7%

5.1%4.6%

* TAP Custom Benchmark: 60% Wilshire 5000 + 25% Lehman Aggregate + 15% MSCI ACWI Free ex U.S.‡Horizon Fund Custom Benchmarks: Short - 46% Lehman Intermediate Credit + 25% London Interbank Offered Rate + 19% Wilshire 5000 + 10%MSCI EAFE; Mid - 46% Lehman Intermediate Credit + 38% Wilshire 5000 + 16% MSCI EAFE; Long - 58% Wilshire 5000 + 22% MSCIEAFE + 20% Lehman Inermediate Credit.** Fund has not been in existence long enough to provide performance figures for these dates.

33

Bond Fund$1,1175.7%

Int’l StockFund$3872.0%

U.S. SmallStock Fund

$9464.8%

WSIB TAP Option�$8,16041.8%

Money Market$3,96620.3% U.S. Large

Stock Fund$1,5237.8%

U.S. Stock Fund$1,0605.4%Horizon Funds

$2,38712.2%

Total PERS 3 Assets$19,509

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SCHOOL EMPLOYEES’ RETIREMENT SYSTEM PLAN 3The WSIB is Trustee of the School Employees’ Retirement System (SERS) Plan 3. The WSIB is responsible for theinvestment of SERS Plan 3 assets and for the provision of self-directed investment options to members of the plan.The DRS is responsible for plan administration, accounting, and record-keeping.

SERS Plan 3 Defined Contribution Assets and PerformanceJune 30, 2002

(In $000’s)

Bond Fund$8,0991.7%

Int’l StockFund$4,4360.9%


$10,4512.2%

WSIB TAPOption�$331,53870.0%

Money Market$58,11812.3%

U.S. LargeStock Fund

$21,3484.5%

U.S. Stock Fund$11,0302.3%

Horizon Funds$28,6266.1%

Total SERS 3 Assets$473,645

�The WSIB Total Allocation Portfolio (TAP) option, the statutory default option for SERS Plan 3, is invested in the Retirement Commingled Trust Fund.These moneys are included in the total for Retirement Funds shown elsewhere in this report. The remaining options are shown elsewhere in this report as self-directed defined contribution funds.

FUND PERFORMANCE












34

ONE-YEAR

-5.2%-9.2%

-0.2%-0.1%

-4.6%-4.5%

-10.4%-10.2%

-17.4%-17.2%

-18.0%-18.0%

-8.4%-8.6%

-10.1%-9.5%

7.6%7.7%

3.0%2.6%

FIVE-YEAR

5.6%3.5%

**5.5%

**4.9%

**3.6%

**3.8%

3.7%3.7%

**4.4%

-1.8%-1.6%

**7.1%

5.3%4.8%

THREE-YEAR

0.1%-4.0%

**2.7%

**-0.4%

**-4.5%

**-7.9%

-9.2%-9.2%

1.9%1.7%

-7.4%-6.8%

** 7.7%

5.1% 4.6%

130970_2.p65 12/3/02, 6:24 PM34

�The WSIB Total Allocation Portfolio (TAP) option, the statutory default option for TRS Plan 3, is invested in the Retirement Commingled Trust Fund.These moneys are included in the total for Retirement Funds shown elsewhere in this report. The remaining options are shown elsewhere in this report as self-directed defined contribution funds.

The WSIB is Trustee of the Teachers’ Retirement System (TRS) Plan 3. The WSIB is responsible for the investmentof TRS Plan 3 assets and for the provision of self-directed investment options to members of the plan. The DRSis responsible for plan administration, accounting, and record-keeping.

TEACHERS’ RETIREMENT SYSTEM PLAN 3

FUND PERFORMANCE











TRS Plan 3 Defined Contribution Assets and PerformanceJune 30, 2002

(In $000’s)

35


Bond Fund$112,000

6.9%

Int’l Stock Fund$77,0204.8%


$109,6646.8%

WSIB TAPOption�$837,05151.7%

Money Market$106,442

6.6%

U.S. LargeStock Fund

$179,45711.1%

U.S. Stock Fund$188,00211.6%

Horizon Funds$8,6710.5%

Total TRS 3 Assets$1,618,306

ONE-YEAR

-5.2%-9.2%

-0.2%-0.1%

-4.6%-4.5%

-10.4%-10.2%

-17.4%-17.2%

-18.0%-18.0%

-8.4%-8.6%

-10.1%-9.5%

7.6%7.7%

3.0%2.6%

FIVE-YEAR

5.6%3.5%

**5.5%

**4.9%

**3.6%

**3.8%

3.7%3.7%

**4.4%

-1.8%-1.6%

**7.1%

5.3%4.8%

THREE-YEAR

0.1%-4.0%

**2.7%

**-0.4%

**-4.5%

**-7.9%

-9.2%-9.2%

1.9%1.7%

-7.4%-6.8%

** 7.7%

5.1%4.6%

130970_2.p65 12/3/02, 6:24 PM35

The Judicial Retirement Account is a defined contribution supplemental retirement fund for state judges. Investments areself-directed by participants in the Judges’ Supplemental Retirement Program, utilizing the Deferred Compensation Programinvestment options offered by the WSIB. The fund is administered by the Office of the Administrator for the Courts whilethe DRS is responsible for plan accounting and record-keeping.

JUDICIAL RETIREMENT ACCOUNT

FUND PERFORMANCE

Savings Pool†


U.S. Stock Market Index FundWilshire 5000




Social Balanced Fund†

Equity Income FundRussell 3000 Value

Growth Company FundRussell 3000 Growth

Independence FundRussell 3000

Overseas FundMSCI EAFE

ONE-YEAR

6.3%

7.6%7.7%

-16.8%-16.6%

-0.2%-0.1%

-4.6%-4.5%

-10.4%-10.2%

-11.4%

-10.2%-7.8%

-32.0%-26.4%

-18.5%-17.2%

-11.9%-9.5%

FIVE-YEAR

6.6%

**7.1%

4.0%3.6%

**5.5%

**4.9%

**3.6%

3.0%

5.2%6.7%

4.8%-0.5%

7.0%3.8%

-0.3%-1.6%

THREE-YEAR

6.5%

**7.7%

-7.6%-8.2%

**2.7%

**-0.4%

**-4.5%

-4.0%

-3.0%-1.9%

-7.6%-15.7%

-4.7%-7.9%

-5.5%-6.8%

Judicial Retirement Account Assets and PerformanceJune 30, 2002

(In $000’s)

36

† Fund has no readily accessible comparative index to use as a benchmark.‡ Horizon Fund Custom Benchmarks: Short - 46% Lehman Intermediate Credit + 25% London Interbank Offered Rate + 19% Wilshire5000 + 10% MSCI EAFE; Mid - 46% Lehman Intermediate Credit + 38% Wilhsire 5000 + 16% MSCI EAFE; Long - 58%Wilshire 5000 + 22% MSCI EAFE + 20% Lehman Intermediate Credit.** Fund has not been in existence long enough to provide performance figures for these dates.

Savings Pool$3,52437.9%

U.S. StockMarket Fund

$5846.3%

Equity IncomeFund$1,62817.5%

Overseas Fund$1111.2%

Bond Fund$3303.5%

IndependenceFund$2,11522.7%

GrowthCompany Fund

$7237.8%

Social BalancedFund$1852.0%

Horizon Funds$1051.1%

Judicial Retirement AccountTotal Assets: $9,305

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DEFERRED COMPENSATION PROGRAM

37

� Savings Pool� Bond Fund� U.S. Stock Market Index Fund� Horizon Funds� Social Balanced Fund� Equity Income Fund� Growth Company Fund� Independence Fund� Overseas Fund

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DEFERRED COMPENSATION PROGRAMThe WSIB is Trustee of State Deferred Compensation Program assets. The WSIB is responsible for the investment of StateDeferred Compensation funds and for the provision of investment options to participants in the program. The DRS isresponsible for Deferred Compensation Program administration, accounting, and record-keeping.

39

OverseasFund

$20,534 1.5%

Equity IncomeFund

$317,668 23.5%

Savings Pool$464,250 34.3%

Bond Fund$52,452 3.9%

GrowthCo. Fund$136,675 10.1%

Independence Fund$275,006 20.3%

SocialBalanced Fund

$29,556 2.2%

U.S. StockMarket Index Fund

$48,213 3.6%

Deferred Compensation ProgramTotal Assets: $ 1,352,780

FUND PERFORMANCE

Savings Pool†


U.S. Stock Market Index FundWilshire 5000




Social Balanced Fund†

Equity Income FundRussell 3000 Value

Growth Company FundRussell 3000 Growth

Independence FundRussell 3000

Overseas FundMSCI EAFE

† Fund has no readily accessible comparative index to use as a benchmark.‡ Horizon Fund Custom Benchmarks: Short - 46% Lehman Intermediate Credit + 25% London Interbank Offered Rate + 19% Wilshire5000 + 10% MSCI EAFE; Mid - 46% Lehman Intermediate Credit + 38% Wilhsire 5000 + 16% MSCI EAFE; Long - 58%Wilshire 5000 + 22% MSCI EAFE + 20% Lehman Intermediate Credit.** Fund has not been in existence long enough to provide performance figures for these dates.

Deferred Compensation Program Assets and PerformanceJune 30, 2002

(In $000’s)

Horizon Funds$8,425 0.6%

ONE-YEAR

6.3%

7.6%7.7%

-16.8%-16.6%

-0.2%-0.1%

-4.6%-4.5%

-10.4%-10.2%

-11.4%

-10.2%-7.8%

-32.0%-26.4%

-18.5%-17.2%

-11.9%-9.5%

FIVE-YEAR

6.6%

**7.1%

4.0%3.6%

**5.5%

**4.9%

**3.6%

3.0%

5.2%6.7%

4.8%-0.5%

7.0%3.8%

-0.3%-1.6%

THREE-YEAR

6.5%

**7.7%

-7.6%-8.2%

**2.7%

**-0.4%

**-4.5%

-4.0%

-3.0%-1.9%

-7.6%-15.7%

-4.7%-7.9%

-5.5%-6.8%

130970_2.p65 12/3/02, 6:24 PM39

130970_2.p65 12/3/02, 6:24 PM40

WSIB DAILY-MANAGED FUNDSFOR SELF-DIRECTED INVESTMENT PROGRAMS

� Washington State Horizon Funds

� Washington State Bond Fund

� Savings Pool

41

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130970_2.p65 12/3/02, 6:24 PM42

WASHINGTON STATE HORIZON FUNDSIn September 2000, the WSIB introduced three new internally-managed, daily-valued balanced funds as self-directed options for participants in the defined contribution retirement plans (TRS 3, SERS 3, PERS 3, and theJudicial Retirement Account) and the state Deferred Compensation Program. The three Horzion Funds provideparticipants in these plans with the ability to choose a diversified asset allocation model that fits their personalrisk and return objectives in a single investment decision. Each Horizon Fund is regularly and carefully rebalancedby WSIB investment professionals in order to preserve the proper asset allocation mix.

Horizon Funds Asset Allocation and PerformanceJune 30, 2002

Short-Horizon

Mid-Horizon

Long-Horizon

** Fund has not been in existence long enough to provide performance figures for these dates.‡ Horizon Fund Custom Benchmarks: Short - 46% Lehman Intermediate Credit + 25% London Interbank Offered Rate + 19% Wilshire5000 + 10% MSCI EAFE; Mid - 46% Lehman Intermediate Credit + 38% Wilhsire 5000 + 16% MSCI EAFE; Long - 58%Wilshire 5000 + 22% MSCI EAFE + 20% Lehman Intermediate Credit.

Since Inception 9/05/00One-Year

Short-Horizon Fund Custom Benchmark ‡

Short-Horizon Total Assets: $10,538,342

-0.2%-0.1%

-0.7%-0.6%


Mid-Horizon Fund Custom Benchmark ‡

Mid-Horizon Total Assets: $23,592,111

-4.6%-4.5%

-6.7%-6.5%

Performance


Long-Horizon Fund Custom Benchmark ‡

Long-Horizon Total Assets: $19,815,497

-13.5%-13.3%

-10.4%-10.2%

Asset Allocation

Cash 25.0%

Non-U.S.Equities 10.2%

U.S. Equities 19.0%

Bonds 45.8%

Cash 0.6%

Non-U.S.Equities 16.4%

U.S. Equities 37.9%

Bonds 45.1%

Cash 0.7%

Non-U.S.Equities 22.5%U.S. Equities

57.7%

Bonds 19.1%

43

PerformanceAsset Allocation

PerformanceAsset Allocation

130970_2.p65 12/3/02, 6:24 PM43

FirstEnergy Corporation 1.9%Norfolk Southern Corporation 1.7%Transocean Sedco Forex Inc. 1.7%Albertson’s Inc. 1.7%Gillette Company 1.7%Lehman Brothers Holdings, Inc. 1.7%Celulosa Arauco y Constitucion SA 1.7%Goldman Sachs Group, Inc. 1.7%DaimlerChrysler NA Holdings Corp. 1.7%Washington Mutual Finance Corp. 1.7%

WASHINGTON STATE BOND FUND

Bond Fund Characteristics and PerformanceJune 30, 2002

In late July 2000, the WSIB introduced the internally-managed Washington State Bond Fund asa daily-valued, self-directed investment option for participants in the defined contributionretirement plans (TRS 3, SERS 3, PERS 3, and the Judicial Retirement Account) and the stateDeferred Compensation Program. This fund’s goal is to provide attractive returns whilecontrolling risk by investing in high quality corporate bonds. This fund is intended forparticipants who want an intermediate-term investment designed to match or moderately exceedthe returns of the Lehman Intermediate Credit Index.

Bond Rating Distribution Fund Characteristics

Industry Distibution Top Ten Credit Issuers

Total Bond Fund Assets: $202,183,706

FUND INDEXAverage Maturity 5.7 years 5.3 yearsYield to Maturity 5.78% 5.64%Duration 4.39 4.14Average Coupon 6.45% 6.72%Number of Holdings 66 2,725

Fund Performance

Washington State Bond FundLehman Intermediate Credit Index

Since Inception7/23/00One-Year

7.6%7.7%

9.4%9.6%

** Fund has not been in existence long enough to provide performance figures for this date.

Bbb46.0%

A31.5%

Aaa4.5%

BelowBbb0.0% Cash

2.6%

Industrial47.4%

Financial27.1%

Utility15.2%

Cash2.6%

Non-Corporate7.7%

Aa15.4%

44

130970_2.p65 12/3/02, 6:24 PM44

45

SAVINGS POOL

Savings Pool Characteristics and PerformanceJune 30, 2002

The Savings Pool is internally-managed by the WSIB and is intended as a conservative short-term investment vehicle where current income and the preservation of capital is the primaryobjective. In addition to the Deferred Compensation Program, this investment option is alsoavailable to participants in the Judicial Retirement Account. The Savings Pool is a diversifiedportfolio of guaranteed investment contracts and short-term cash funds. It’s investment goalis to preserve principal while earning a rate of return in excess of the current yield of U.S.Treasury securities of similar maturities.

GE Life and Annuity Assurance 13.0%John Hancock Life Insurance Co. 11.1%Hartford Life Insurance Co. 10.5%Principal Life Insurance Co. 9.6%Jackson National Life Insurance Co. 9.1%Monumental Life Insurance Co. 8.9%Pacific Life Insurance Co. 8.6%Travelers Life & Annuity Co. 6.8%Allstate Life Insurance Co. 6.5%New York Life Insurance Co. 3.9%

Fund Characteristics

Top Ten GIC Issuers

Total Savings Pool Assets: $467,505,733

Average Maturity 2.3 yearsAverage Coupon 6.01%Number of Holdings 27

GIC Rating Distribution

Fund Performance One-Year Three-Year Five-Year

Savings Pool † 6.3% 6.5% 6.6%

Aa110.7%

Cash6.9%

Aa342.3%

Aa240.1%

† Fund has no readily accessible comparative index to use as a benchmark.

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INDUSTRIAL INSURANCE FUNDS

47

� Accident Fund� Medical Aid Fund� Pension Reserve Fund� Supplemental Pension Fund

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130970_2.p65 12/3/02, 6:24 PM48

8,5348,3948,456

7,510

199919981997 2000

9,000

8,000

7,000

6,000

5,000

4,000

3,000

2,000

1,000

0

The WSIB manages Industrial Insurance funds on behalf of the Department of Labor and Industries(L & I). The Industrial Insurance Portfolio consists of four separate funds that total $8.6 billion.


ACCIDENT FUNDThis fund earns revenue from employer premiumsfor industrial insurance and investment earnings.The primary use is to pay disability benefits forinjured workers, such as time loss compensation,permanent partial disability, certain travel andretraining expenses, burial awards, and administrativecosts.

MEDICAL AID FUNDThe Medical Aid Fund earns income frompremiums paid by both the employer andemployee, as well as investment earnings. Paymentsare made for conservative medical care, hospitalservices, artificial appliances, physical and vocationalrehabilitation, travel expenses, any other servicerequired by the injured worker, and administrativecosts.

PENSION RESERVE FUNDThis fund is maintained by transfers of money fromthe Accident Fund at the time that a new pensioneris setup. This pays the permanently disabled workerand survivors of deceased injured workers.

SUPPLEMENTAL PENSION FUNDThe Supplemental Pension Fund receives incomefrom employer and employee premiums andinvestment earnings. These funds are used tosupplement time loss and pensions based on older,lower schedules and to compensate for cost of livingincreases.

HISTORICAL MARKET VALUESJune 30, 2002

$ Millions

49

8,630

2001

8,636

2002

130970_2.p65 12/3/02, 6:24 PM49

Percent

1.4%

16.2%45.0%1.8%

19.2%

83.6%

12.8%2.4%

15.2%

1.2%

100%

(In 000’s)

$ 125,381

$ 1,397,223 3,888,198

156,307 1,655,786

$ 7,222,895

$ 1,102,621 209,906

$ 1,312,527

100,297

$ 8,635,719

INDUSTRIAL INSURANCE FUNDSASSET ALLOCATION

June 30, 2002The Industrial Insurance Fund portfolios are weighted strongly toward credit bonds with a meaningful allocation toequities. Credit bonds allow the funds to hold assets with higher yields than government bonds as a result of theircredit risk. Most of this weighting lies in A and Baa rated companies. The equity allocation provides diversificationfrom fixed income assets, with equities providing both higher return and greater volatility over the long term. Thisallocation also acts as an inflation hedge for the Medical Aid Fund, which has the largest equity holding of the fourfunds. At the end of the fiscal year, the total equity allocation was 15.2 percent.

Short-Term (Cash)

Long-Term Fixed IncomeU.S. Government SecuritiesCredit SecuritiesAsset-Backed SecuritiesMortgages and Mortgage-Backed Securities

Total Short-Term and Fixed Income

EquitiesU.S. Equity Market IndexMSCI EAFE Index

Total Equity

Total Accruals

Market Value

50

Assets

TOTAL

Accident FundMedical Aid FundPension Reserve FundSupplemental Pension Fund

TIME-WEIGHTED RETURNSJune 30, 2002

OneYear

5.2%3.0%9.2%3.7%

ThreeYears

6.0%4.5%8.5%6.1%

FiveYears

7.1%6.8%7.7%6.3%

— Annualized —

130970_2.p65 12/3/02, 6:24 PM50


51

BOND PORTFOLIO CHARACTERISTICSJune 30, 2002

Sector Distribution

U.S. Treasuries 9.9%Agency 9.8%Credit 54.8%Asset-Backed 2.2%Mortgages 15.9%CMBS 7.4% 100.0%

Credit Distribution

TSY 9.9%AGY 19.7%Aaa 16.8%Aa 4.8%A 22.3%Baa 24.9%<Baa 1.6% 100.0%

Maturity Distribution

0 – 1 Year 3.4%1 – 3 Years 11.3%3 – 5 Years 15.9%5 – 7 Years 15.6%7 – 10 Years 11.7%10 – 15 Years 8.8%15 – 20 Years 6.1%20 – 25 Years 6.3%25+ Years 20.9% 100.0%

Top Ten IssuersMarket Value – June 30, 2002

$000

United State Treasury $709,431FHLMC Structured Mortgages $358,160FHLB Agency Bonds $324,556FNMA Structured Mortgages $229,807DLJMA CMBS $177,464FNMA Agency Bonds $144,084Tennessee Valley Authority $131,288RFMSI - CMO $100,144FHLMC Agency Bonds $92,815Hydro Quebec $82,892

Coupon Distribution

0 – 4.9% 6.6%5 – 6.9% 50.4%7 – 7.9% 30.2%8 – 8.9% 10.0%9 – 9.9% 2.6%10+% 0.2% 100.0%

Effective Duration

0 – 1 Year 3.8%1 – 3 Years 15.4%3 – 4 Years 10.4%

4 – 6 Years 1.6%6 – 8 Years 12.0%

8+ Years 36.8% 100.0%


130970_2.p65 12/3/02, 6:24 PM51

INDUSTRIAL INSURANCE FUNDSCREDIT SECTOR DETAIL

June 30, 2002

Top Ten Credit HoldingsMarket Value – June 30, 2002

$000GMAC – 7/15/05 $44,189Washington Mutual – 8/15/06 $39,218Bombardier Capital – 8/15/04 $38,448Norsk Hydro – 1/15/29 $37,342Hydro Quebec – 4/15/30 $35,011Albertson’s Inc. – 2/23/28 $32,397Amerada Hess Corp. – 8/15/31 $31,521Sprint Capital Corp. – 11/15/28 $29,729FirstEnergy Corp. – 11/15/31 $28,588Cinergy Corp. – 12/16/08 $28,139

Sector Distribution

Industrial 50.3%Utilitie 16.5%Financial 28.0%Non-Corporate 5.2% 100.0%

Credit Distribution

Aaa 1.5%Aa 8.8%A 40.9%Baa 45.8%<Baa 3.0% 100.0%

Effective Duration

0 – 1 Years 2.2%1 – 3 Years 17.3%3 – 4 Years 12.7%4 – 6 Years 17.9%6 – 8 Years 11.1%8+ Years 38.8% 100.0%

Top Ten Credit IssuersMarket Value – June 30, 2002

$000Hydro Quebec $82,892Washington Mutual $80,608Verizon $79,582Ford Motor Company $75,770Citigroup $73,880Goldman Sachs $72,681Burlington Northern $72,020Boeing Company $67,339Sprint Capital Corporation $65,282Union Pacific Resources $64,819

Coupon Distribution

0 – 4.9% 0.5%5 – 6.9% 43.1%7 – 7.9% 38.7%8 – 8.9% 13.0%9 – 9.9% 4.6%10+% 0.1%

100.0%

Maturity Distribution

0 – 1 Year 2.4%1 – 3 Years 12.7%3 – 5 Years 18.9%5 – 7 Years 11.7%7 – 10 Years 11.8%10 – 15 Years 3.2%15 – 20 Years 5.1%20 – 25 Years 5.8%25+ Years 28.4%

100.0%

52


130970_2.p65 12/3/02, 6:24 PM52

� Agriculture Permanent Fund� Common School Permanent Fund� Normal School Permanent Fund� Scientific School Permanent Fund� State University Permanent Fund� Millersylvania Park Trust Fund

� Developmental Disabilities Endowment Trust Fund� Game and Special Wildlife Fund� Guaranteed Education Tuition Fund� Radiation Perpetual Fund� Reclamation Revolving Fund� State Emergency Reserve Fund� State Employees Insurance Reserve

PERMANENT FUNDS&

OTHER TRUST FUNDS

53

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130970_2.p65 12/3/02, 6:24 PM54

TotalReturn

8.4%8.4%9.4%10.1%10.2%8.6%

2.5%2.6%

The WSIB manages assets for six Permanent Funds, each with its own specific purpose and investmentconstraints. In aggregate, the assets of the Permanent Funds total $684 million. Permanent Funds arenon-expendable trust funds in which the investment principal (corpus) remains intact as required by theWashington State Constitution.

PERMANENT FUNDS

55

University$23,770

Millersylvania$5

AgriculturalCollege$140,810

Scientific$154,847 Normal

School$201,487

CommonSchool

$163,486

Permanent Fund Market ValueAs of June 30, 2002

(In $000’s)The Permanent Funds are invested in fixed incomeand short-term holdings with the exception of theCommon School Permanent Fund, which is alsoinvested in the U.S. Equity Market Index Fund. TheState University Permanent Fund is invested in theWSIB Commingled Monthly Bond Fund and short-term holdings.

The five education Permanent Funds wereestablished through land grants from the federalgovernment to benefit the Washington State schoolsand colleges. Investment earnings are distributedto the schools, colleges and universities in the statefor the purpose of bond repayment, capitaldevelopment, and facilities maintenance.

The Millersylvania Park Trust fund was establishedfrom a gift of cash and securities. The earnings oninvestments are used for improvement, maintenance,and upkeep of the Millersylvania State Park.

Agricultural College FundCommon School FundNormal School FundScientific University FundState University Fund Lehman Aggregate Index

Millersylvania Park Fund 90 Day T-Bill

TotalReturn

7.3%7.3%7.6%7.5%7.7%7.6%

5.0%4.8%

TotalReturn

7.9%7.6%8.2%8.2%8.5%8.1%

4.7%4.6%

Fiscal Year 2002 Distributions: Agricultural College Fund, $8,978,510; Common School Fund, $10,197,078;Normal School fund, $12,358,504; Scientific University Fund, $9,861,488; State University Fund, $1,452,790;Millersylvania Park Fund, $126.

Distribution returns include coupon interest, realized gains and losses, and additional income less expenses and fees.Total return also includes unrealized market gains and losses on the investments held based on values captured at a pointin time (June 30, 2002).

One-YearPerformance as ofJune 30, 2002 Distribution

Return

6.9%6.6%6.8%6.8%6.9%

4.8%

Three-Year Five-YearDistribution

Return

6.8%6.5%6.6%6.9%6.6%

2.7%

Total: $684,405

DistributionReturn

6.9%6.6%6.7%6.7%7.0%

5.0%

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The WSIB manages assets for seven other trust funds that total about $289 million in aggregate.Each fund has its own specific purpose and investment policy.

� Guaranteed Education Tuition Fund ($115.8 million)

The Guaranteed Education Tuition (GET) Program allows individuals or groups to purchase statecollege and university tuition units for future use at current prices. Program administration isunder the authority of the Committee on Advanced Tuition Payment. The WSIB serves as Trusteefor and invests the funds from advance tuition purchases in a mix of short-term holdings, TreasuryInflation Notes, U.S. equity and non-U.S. equity.

OTHER TRUST FUNDS

GET Fund Asset Allocation and Fund PerformanceJune 30, 2002

$000

56

� Developmental Disabilities Endowment Trust Fund ( $5.7 million)

The Developmental Disabilities Endowment Trust Fund was established to support individualswith developmental disabilities through private contributions and public appropriations. The WSIBinvests the fund in a mix of short-term holdings, Treasury Inflation Notes, fixed income, and U.S.equity.

Developmental Disabilities Endowment Asset Allocation and Fund PerformanceJune 30, 2002

$000

Fund PerformanceDDEFInflation (CPI)

OneYear3.1%1.1%

Since Inception(June 2000)

4.9%2.1%

PerformanceGET FundInflation (CPI) + 4.5%

OneYear-2.8%5.6%

Since Inception (Sept. 1998)

2.6%7.0%

ThreeYear1.8%7.2%Treasury

InflationNotes

$50,25843.4%

U.S. Equity$37,51032.4% Cash

$2,2201.9%

Non-U.S.Equity$18,09115.6%

Washington StateBond Fund

$7,7626.7%

WashingtonState Bond

Fund$1,28622.6%

U.S. Equities$680

11.9%Cash

$1,34223.6%

TreasuryInflationNotes$2,38541.9%

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� State Emergency Reserve Fund ($116.1 million)

The State Emergency Reserve Fund was created under the guidelines of State Proposition 601 to providethe state of Washington with a budget reserve fund. The moneys in the fund are managed by the Office ofFinancial Management and overseen by the budget committees of the state House of Representatives andSenate. The WSIB began investing the State Emergency Reserve Fund in July 1999. The fund is investedin short-term holdings.

� Game and Special Wildlife Fund ($11.6 million)

This fund was created to hold moneys received as compensation for wildlife losses. The WSIB is authorizedto invest surpluses in the Special Wildlife Fund. The program is under the authority of the State Fish andWildlife Commission. The fund is invested in short-term holdings.

� State Employees Insurance Reserve ($38.3 million)

This fund was created for the purpose of holding and investing reserves needed for the payment of claimsin insurance programs under the Health Care Authority. The account is funded from the reserves of thepublic employees’ and retirees’ insurance account. The fund is invested in short-term holdings.

� Radiation Perpetual Fund ($275 thousand)

This fund was created to provide moneys for the maintenance, monitoring, and other care of radioactivematerials at sites no longer operating. Funding is from a charge imposed on each pound of uranium orthorium compound milled out of raw ore. The program is under the authority of the Department ofHealth. This fund is invested in short-term holdings.

� Reclamation Revolving Fund ($1.1 million)

This fund was created to provide a source of funding for the reclamation and development of landssuitable, and economically available, for development as agricultural lands. This fund is invested in short-term holdings and municipal water district bonds.

OTHER TRUST FUNDS

57

Performance as ofJune 30, 2002

State Emergency Reserve FundGame and Special Wildlife FundState Employees Ins. ReserveRadiation Perpetual FundReclamation Revolving Fund 90 Day T-Bill

One-Year

2.4%2.3%2.3%2.3%3.7%2.6%

Five-Year

N/A5.1%5.0%5.0%5.4%4.8%

Three-Year

4.7%4.6%4.6%4.6%5.1%4.6%

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GLOSSARY

Acquisitions/Buyouts. The purchase of acontrolling interest in a corporation, or portionthereof, in order to take over assets and/oroperations.

Active Management. An investmentmanagement approach with the objective ofattaining excess risk-adjusted return versus thebenchmark as a result of structuring a portfoliodifferently from the benchmark.

Asset. Anything owned that has value and ismeasurable in terms of money.

Asset Class. Categories of investments thatshare certain characteristics and exhibit similarpatterns of return.

Benchmark. The performance objective orstandard represented by a model portfolio usedto define the return against which [another]portfolio is to be evaluated.

Beneficiary. The recipient of fund benefits.

Cash Equivalents. Highly liquid, very safeinvestments which can be easily converted intocash, such as Treasury Bills and money-marketfunds.

Commingled Fund. An investment fund inwhich the manager pools the assets of severalaccounts to permit more efficient managementand to reduce administrative costs.

Defined Benefit Plan. A pension plan thatpromises to pay a specified amount to eachperson who retires, generally based upon a

formula combination of years of service, ageat retirement, and salary history.

Defined Contribution Plan. A pension planin which the retirement benefit is based solelyon the amount contributed to an individualaccount plus net investment earnings. Theemployee bears the investment risk, as there isno guaranteed rate of return and the value ofthe member’s account will increase or decreasebased on fluctuations in the market.

Distressed Entities. The investment of equityor debt capital into an entity with various degreesof management assistance to help fix theunderlying problems of the company.

Diversification. A strategy of reducingexposure to risk by combining a variety ofinvestments among different asset classes, whichare unlikely to move in the same direction.

Efficient Market Theory. The hypothesis thatprices of securities fully reflect all availableinformation.

Ex-officio Member. A member by virtue ofoffice or position.

Fiduciary. An individual, corporation orassociation holding assets for another party,often with the legal authority and duty to makedecisions regarding financial matters on behalfof the other party.

Fixed Income. Securities representing debtobligations and usually having fixed paymentsand maturities. Different types of fixed income

58

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The WSIB is an equal opportunity and affirmative action employer. Every effort will be made to provide reasonable accom-modation and accessibility to WSIB employees and the public we serve.

GLOSSARY

59

securities include government and corporatebonds, mortgage-backed securities, asset-backedsecurities, convertible issues, and sometimes alsoincludes money-market instruments.

Index. A group of securities that representsthe universe of available investments in a specificclass or subclass of assets.

Liquidity. Measures or describes the ease andtime in which assets can be turned into cashwithout an impact on price.

Nonvoting Members. Members, typicallyexperts in the investment and economics fields,who are appointed by the Board and act in anadvisory capacity.

Passive Management. A money managementstrategy that seeks to match the return and riskcharacteristics of a market segment or index, bymirroring its composition.

Private Equity. The infusion of equity capitalinto a private company (one which is notavailable on the public markets).

Risk (investment). The degree of uncertaintyand/or the amount of possible loss on aninvestment.

Self-Directed Investment. An investmentprogram in which the individual members orparticipants choose the investment vehicles fortheir assets, usually from among a set ofinvestment options provided by the trustee.

Stock. Ownership of a corporation representedby shares that are claim on the corporation’searnings and assets.

Trustee. An individual or organization whichholds or manages and invests assets for thebenefit of another.

TUCS Public Fund Median. Trust UniverseComparison Services Median return of otherpublic funds.

Venture Capital. Equity financing of early,expansion, and later stage emerging smallbusinesses. Companies grow from start-up tomedium size businesses, and are then either soldto the public through an Initial Public Offering,or are sold to a strategic or financial buyer.

Volatility. In financial matters, volatility ofreturns is the measurement used to define risk.It describes the spread of annual returns fromlowest to highest over a particular period. Thegreater the volatility, the higher the risk.

Voting Members. The nine voting membersof the Board. They include four members whichrepresent various stakeholders in the pensionsystems, three ex-officio members, and onelegislator from each house. In September 2002,a tenth voting member will be addedrepresenting active members of the SchoolEmployees’ Retirement System.

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Special thanks to the following people for their work in producingWSIB’s 2002 Annual Report:

Scott Huntley - Project SupervisorPatricia Sheridan - Project Coordinator

Shauna Raphael - Graphics and Page DesignSteve Verschoor - Financial Statements and Schedules

Tom Edwards and Brad Christoffer - Technical SupportShauna Raphael - Cover Photograph

Cover Photo: Gig Harbor

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Washington State Investment Board2424 Heritage Court S.W.

P.O. Box 40916Olympia, WA 98504-0916

(360) 664-8900

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